PRE-ARBITRAL PROCESS - AN OBLIGATION OR A FORMALITY? (By- Akash Chatterjee & Moulinath Moitra)
PRE-ARBITRAL
PROCESS - AN OBLIGATION OR A FORMALITY?
Authored By- Akash Chatterjee
& Moulinath Moitra
Abstract
Arbitration has grown in importance tremendously over the years
centering its focus in commercial and business matters especially. While the
process is really effective and yields good results too as compared to the long
haul of litigation, there is a proper system that needs to be followed. The
matter of concern for this particular research is the pre-arbitral stage of any
dispute. The pre-arbitral stage is interpreted differently by courts and it
assumes particular significance in shaping conformity to it. This paper
analyses the validity of obeying and not obeying the same and analyses two
different perspectives on the same.
KEYWORDS-
Pre-arbitral
Arbitration
Case laws
Conformity
Mandatory
Discretionary.
MERE FORMALITY PERSPECTIVE-
Various decisions in the case of VISA
International Limited v. Continental Resources (USA) Limited [1] have
shown how the Court interprets intention of parties to decide on such
pre-arbitration agreements. In the present case the intention of having a sound
communication and exchange of perspectives has been duly carried out by the
recorded communication between them.
Quick Heal Technologies Limited v.
NCS Computech Private Limited [2] was an important step in determining
the nature of these agreements as in this case, the court held that arbitration
initiation was not pre-mature due to noncompliance of pre-arbitration
proceedings because the prior correspondence between the related parties had
left no scope for an amicable settlement and the disputes needed to be settled.
The analysis of the nature of the
proceedings depend on a case-to-case basis and in the present situation,
correspondence between the parties had been quite regular till the moment
cooperation failed and the resolution of disputes could have been no longer
continued with agreements. In such cases where arbitration becomes rather
inevitable towards dispute resolution, the pre-arbitral escalation gets reduced
to a mere formality.
Deciphering the nature of dispute
against the factual matrix got highlighted in the decision of the Supreme Court
in M/S Imz Corporate Pvt Ltd vs Msd Telematics Pvt Ltd[3],
wherein the Court observed that the conduct of the parties was such that
relegating them to the pre-arbitration stage and complying with the same would
be a mere empty formality and having ignored that can in no way prejudice the
arbitration proceeding.
The primary objective of such
procedural formalities depends on the scope of arriving at a mutually agreed
solution and preventing the escalation of the dispute further. It is almost as
if exploring the last available options to encourage greater cooperation and
avoid the last resort to arbitration. Hence the nature of the same is not a
mandatory condition but a general advisory. Since the entire process depends on
the will and intention of the parties, hence its application can also differ
from case to case and the nature of the present dispute very clearly eliminates
any cooperative settlement to be arrived at, thereby depending on arbitration
finally.
The traditional jurisprudential
attitude towards pre-arbitration clauses has been one of non-mandatory as
evident in cases like Sulamerica Cia Nacional de Seguros SA v Enesa
Engenharia SA[4],
Wah v Grant Thornton International Ltd[5],
clearly due to the lack of certainty in them.
In the case of Walford v Miles[6],
it was adjudicated by the House of Lords that the lack of certainty in the
negotiation agreement made it unenforceable. The reasoning stemmed from want of
grounds to make a particular agreement enforceable and to reasonable calculate
time and delay in going through the process as well.
This case became a much-cited
authority with increasing reliance being placed on the agreements’ certainty to
construe its mandatory obligation. It is evident in cases like Courtney
& Fairbairn Ltd. v Tolaini Brothers[7]
and Dhanani v Crasnianski[8]
as well as in Shaker v Vistajet[9].
The extent to which such negotiations
can be carried on and the degree of applicability has been quite controversial
in various judgements, with one leading case of Cable & Wireless v
IBM[10]
in which the bonafide attempt of parties to solve disputes in good faith,
their efforts through authorized representatives was recognized as well.
In the case of Emirates Trading
Agency LLC v. Prime Mineral Exports Private Limited[11]
one important aspect was pointed out
which was phrased as – “friendly discussions”, to which the parties were
required to resort to.
The abovementioned authorities
clearly enable a proper construction of a pre-arbitral clause -
·
Sought
to provide for a reinforcing cooperative mechanism.
·
Encouraged
mutual resolution of the disputes and a proper communication between the
parties
·
Aimed
at keeping channels of dispute resolution open between the parties.
Another important perspective was
provided by the ruling in the case of, S Kumar Construction Co and Anr.
vs. Municipal Corporation of Greater Bombay[12]
where two conditions were held to satisfy the test of whether the
pre-arbitration process is mandatory, namely –
·
The
nature of drafting language in the contract
·
Facts
of the case in which the same would be applicable.
In the light of this judgement, a
discretionary and advisory clause of pre-arbitration can be attributed to a
clause due to the following points-
·
Lack
of clarity on the methods
·
Lack
of certainty of the time period for compliance
·
Absence
of a pre-condition or a prerequisite being expressly mandatory
·
Remedies
or provisions for noncompliance of pre-arbitration escalation not specified as
well.
The need to expedite the process and
settle a remedy is one of the most important reasons to choose arbitration. In
the case of Shin-Etsu Chemical Co. Ltd. v. M/s. Aksh Optifibre Ltd.[13]
it was held that the purpose of the process would be defeated if the
expedited arbitration action will not be commenced and there would be a long
haul even before beginning with the same.
The importance of the intention of
the parties has to be ascertained as guided by the Supreme Court in the case of
Visa International Ltd v. Continental Resources (USA) Ltd[14],
and in the present case the escalation procedure and the correspondence is
evident enough to show the inclination towards reaching arbitration stage by
both the parties.
With reference to the same issue ,
Supreme Court has also dealt the case of Zhejiang Bonly Elevator Guide
Rail Manufacture Co. Ltd. Vs. Jada Elevator Components[15],
where intention of the parties to settle differences was evident through the
nature of correspondence between them.
The most relevant judicial ruling,
however came up in the case of Rajiv Vyas v. Johnwin Manavalan[16],
wherein it was held that a condition precedent to arbitration if not fulfilled
would not per se invalidate the proceedings thereof.
Hence, it is established that the
nature of pre-arbitration escalation procedure is non mandatory and its
application is decided according to the case ad its importance lies with the
intention of the parties aligned with the dispute.
This view has been further reiterated
in the case of Tulip Hotels Pvt Limited v. Trade Wings Limited[17]
where a mere disagreement in participating in condition precedent to
arbitration was held not to impact the validity of arbitration proceedings.
The view in Ravindra Kumar
Verma vs M/S. Bptp Ltd. & Anr[18] has been quite direct; that the nature of
pre-arbitration agreements are directory and they cannot be interpreted as
mandatory.
In the case of M/s Haldiram
Manufacturing Company Pvt. Ltd v. M/s DLF Commercial Complexes Ltd[19],
the mandatory nature of pre-arbitral seps was highlighted, and this decision as
subsequently overruled as well in the cases of Siemens Ltd. vs. Jindal
India Thermal Power Ltd[20]
and Sarvesh Security Services Pvt Ltd vs Managing Director, DSIIDC[21]
which further stated the entire process to be optional as well.
The ambiguity around whether or not
pre-arbitral clauses are mandatory was settled by the case of Holloway v
Chancery Mead Limited[22]
in which three clear conditions were laid down –
·
The
process must be sufficiently certain such that it rules out an chances of
agreement in commencing it.
·
The
administration of the process should be definite and a model approach must be
specified
·
Process
of selecting appropriate persons and paying them must also be described in the
agreement.
In the case of Sul America v
Enesa Engenharis[23],
the dispute was regarding a pre-arbitral obligation which stated that the
parties should resort to mediation. The court held such a clause to be non
-mandatory because there was no definite clarity as to the rights of the
parties in the process concerned.
In the cases of Sikand
Construction Co. v. SBI[24]
and Saraswati Construction Co. v. East
Delhi Coop. Group Housing Society Ltd[25] it was clarified that the nature of pre-arbitral steps
are not a mandatory requirement that has to be followed.
THE OTHER PERSPECTIVE –
In the light of growing demand
for arbitration as a dispute resolution mechanism, the mutual cooperation of
the parties becomes the most fundamental aspect in the adjudication mechanism.
Whereas in this case, the actions of the employer in deliberately ignoring the
pre-arbitration stage cannot be excused.
The recent English case of Republic
of Sierra Leone v. SL Mining Limited[26]
discussed a related principle of law-
·
The
matter of dispute related to a multitier dispute resolution and the
non-observance of pre-arbitration procedures.
·
This
led to challenging of the arbitral award and the Court inspected into the
arbitration agreement.
·
It
was a matter of admissibility as decided by the Court.
·
The
same has also been clarified by cases like -BG Group v. Republic of
Argentina[27]
and BBA v. BAZ[28]
and BTN v BTP[29],
a Singapore case.
Further in the case of Emirates
Trading Agency LLC v Prime Mineral Exports Private Ltd[30],
the importance of pre-arbitration dispute resolution strategies as agreed to be
resorted to have been given high importance. It was also determined to be well
enforceable.
The case of NWA & ors v NVF
& Ors[31]
also holds that the compliance with pre-arbitral proceedings is a matter of
admissibility and that has to be taken into account before beginning the
arbitration procedure.
If in any well-defined
pre-arbitration dispute escalation has been laid down and the failure to comply
with the same should be taken into account before the arbitration process
begins.
English Courts have interpreted on
this issue in yet another situation of Ohpen Operations v Invesco[32]-
·
In
this particular disputed contract, there was a pre-arbitration stage - a
mediation stage as a mandatory escalation procedure to be adhered to in order
to proceed to the arbitration stage.
·
The
observations in this case were made on some of the following legal principles –
Ø Expression of condition precedent
clearly in the contract
Ø Agreement creating an obligation
resorting to alternative dispute resolution.
Ø The process does not have to be
necessarily formal but must be clear and certain, objectively oriented and
involving any third party or mediator or any other mechanism to fulfil the
purpose aimed.
·
Applying
these principles in the case, the arbitration proceedings were stayed, as the
pre-arbitration agreement was obligation and had to be construed along with the
contract itself, the dispute resolution created a condition precedent even
though the exact terminology was not used, and in essence had to be carried
out.
·
The
provisions were clear enough to be mandatorily enforced and interpreted and
hence avoiding it was held to be a breach.
In the case of Emirates Trading
Agency LLC v Prime Mineral Exports Pte Ltd (Emirates)[33],
it was held that any noncompliance with the pre-arbitration conditions which
form a part of arbitration agreements can render the jurisdiction of the
arbitration tribunal questionable as they are mandatory in nature.
It has been an accepted viewpoint
that the nature of such agreements varies from contract-to-contract basis and
have to be interpreted accordingly as well. The specific words and the way of
drafting the clauses provides necessary guidance to the Court to decide on the
applicability and nature of the same.[34]
The case of Wah v Grant
Thornton[35],
analysed the criteria for compliance –
·
It
is a positive obligation aiming at an amicable resolution of the dispute.
·
Sufficiently
certain and an unequivocal commitment towards a process
·
The
process should be able to guide the prescribed steps which a party is required
to take or carry out
·
A
degree of minimum involvement and the extent to which such process would
continue should also be specified in the same.
In the case of Cable &
Wireless PLC v IBM United Kingdom Ltd[36].
it was stated that any dispute resolution mechanism through ADR techniques in a
contract is mandatorily enforceable and hence an obligation.
A pre-arbitral dispute needs to be
mandatorily followed when -
·
The
nature of drafting the clause is one bearing the essence of a precondition.
·
Is
sufficiently precise and conforms to judgements declaring such escalation to be
a necessary precondition to arbitration.
·
Imposes
an obligation on the parties to obey the same just like the other clauses of
the contract.
In Burlington Resources Inc. v
Republic of Ecuador[37]
it was settled that when a particular valid precondition is laid down, the
non-observance of the same disputed the jurisdiction of the tribunal.
Pre-arbitration necessities are
typically a question of admissibility and affects the nature of claims
forwarded in the dispute. The jurisdiction of the tribunal maybe settled with
the necessary contract, but the question of admissibility has to determine
whether the tribunal can at all adjudicate and admit the argument on claims and
the entire process thereof.[38]
On adjudicating a non -compliance,
the nature and need for a remedy becomes an important question regarding which
it has been widely accepted that either the defect of noncompliance be cured –
by allowing the parties to correct the procedure or dismiss the claim in its
entirety.[39]
The Contractor humbly draws the
attention of the tribunal to the nature of adjudicated judicial rulings and
carefully consider the noncompliance breach in the present case before
adjudicating the matter further.
In Oriental Insurance Company
v. M/s Narbheram Power and Steel[40]
and in case of United
India Insurance Co. v. Hyundai
Engineering and Construction Co[41], it has been emphasised that
arbitration clause has to be strictly construed in the agreement, and the
clauses have to be understood with respect to how do they express the intention
of the parties in arbitration.
In Distilleries Private Limited v.
Demerara Distillers Limited, the agreement required the parties to solve
the disputes first through a mediation.
One of the parties had skipped the stage and directly proceeded towards
arbitration, Here Supreme Court held it to be premature for want of adequate
compliance with necessary processes.
In a recent High Court case - Sanjay
Iron and Steel Limited v. Steel Authority of India[42],
where a particular pre-condition of conciliation was agreed to by the parties
and set out as a pre-arbitral step, that could not be avoided for reasons of
expenditure.
The aforementioned case laws set out
a standard of importance that is affixed on a precondition to arbitration, by
way of emphasising the vital significance of agreement and consensus on the
same. The entire arbitration way is a dispute resolution and goal-oriented
mechanism that strives to expedite the process and hence such tiers of the
process must be duly respected and obliged.
In Nirman Sindia vs Indal
Electromelts Ltd[43],
it was held that when the parties decide to resort to a particular mode of
dispute resolution, they are under an obligation to obey the same and that
skipping a stage of the same cannot be allowed.
The mandatory interpretation of the
pre-arbitral escalation gained impetus from the judgement in the case of
International Research Corp PLC v. Lufthansa Systems Asia Pacific Pte Ltd
and Another[44],
where it was decided that the compliance of pre-arbitral dispute resolution was
mandatory and any failure of the same could oust the jurisdiction of the
tribunal.
The contractual aspect of obeying a
laid down and consented precondition was highlighted in the case of S.B.P.
& Co vs Patel Engineering Ltd. & Anr[45],
where it was held that the parties sign and agree on mutual terms to go through
a specific procedure which they cannot refrain from in the matter of disputes.
In the leading case of M.K Shah
Engineers & Contractors v. State of M.P.[46],
it was settled by the Supreme Court that the pre-arbitration procedures are
mandatory compliance and the parties cannot skip or bypass them.
The increasing need for arbitration
mechanism has opened up different tiers of the process leading up to
arbitration as the final stage. This is exceptionally important in the
construction contracts having high degrees of technicality and knowhow and
requiring involvement of management, administrative personnel to work out
dispute resolution among them.[47]
Studies have shown how the presence
of a mediator in aiding both the parties to reach mutually agreed settlement
has helped in the dispute resolution mechanism.[48]
In the case of Simpark
Infrastructure (P) Ltd. v. Jaipur Municipal Corpn[49].,
it was held that the amicable solution finding was a condition precedent to
arbitration and the process has to be followed in order.